Are Unsecured Loans Passing on Interest Rate Cuts?

Personal Loans are suitable for people no matter what their credit rating and may be acquired right away online. They are normally for a relatively small amount paid back over several years.

Are unsecured loans passing on interest rate cuts?
8th October 2010

The Bank of England, following on from research into the unsecured loans sector, has published findings that suggest there is a significant gap between their base rate and the interest rate that providers are levying onto their customers. The rate that the Bank of England has set, 0.5%, has been set this way for the past 18 months or so following on from stark reductions because of the economic climate. Meanwhile, a comparison with the rates passed onto customers shows that the trend has gone the other way, with some customers asked to pay 11%.

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This gap is widening, and the different motivations of lenders have been explored in more depth. For one, the increased risk of providing finance to some borrowers following on from their reduced credit rating, has made lenders think twice about how accessible they make loans which aren’t secured against assets. On the other hand, there is also the consideration of lender profits in the downturn, and the enthusiasm of businesses offering loans with bad credit to retain the healthy revenue they gained in better times.

At this point, it can be a good idea to compare the situation with interest rates to August 2007. Because of the sheer amount of unsecured loans on the market, you could expect to pay 8% interest if your credit was relatively good. This can be compared with the Bank of England’s base rate, which was around 2.5% less than this at the time.

If it is secured loans that you are interested in, the picture isn’t that much better. Even though the Bank of England base rate dropped 5% as mentioned earlier, the reduction in the interest rates of loans secured to a consumer’s assets was only by 2%, resulting in an average of 4% charged to the borrower. This represented the situation seen for those looking to renew their mortgage amongst other things.

In light of the research, the Bank had this to say: “During the recent financial crisis, the bank rate was reduced sharply, but in general the interest rates charged on new lending to households did not fall by as much and indeed some interest rates rose.”

All of this comes as banks, which provide a lot of finance to the public as present, has come under renewed scrutiny from the Government for the lack of lending taking place with the public. Whereas Vince Cable, Business Secretary in the Coalition Government, argued that this was because of credit drying up, banks have argued this, saying that there simply isn’t the demand for unsecured loans in the market at present. Whether this is because of the disproportionately high interest rates is yet to be seen.

However, the Bank wasn’t entirely critical of lenders, saying that the move to increase interest rates could be an attempt to increase capital lost to toxic assets. The report, which is released every quarter, didn’t come to an absolute conclusion – even though there might be some more analysis in the three months ahead of us.